The GG corporation pays no cash dividends currently and is not expected to for the next 4 years. Its latest EPS was 5$ , all of which was reinvested in the company. The firm’s expected ROE for the next 4 years is 20% per year , during which time it is expected to continue to reinvest all of its earnings. Starting in year 5 , the firm’s ROE on new investments is expected to fall to 15%per year. GG market capitalization rate is 15% per year.
a) What is your estimate of GG’s intrinsic value per share ? b) Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year?
If all is invested the the growth rate is 20% per annum. Earnings by the end of 4th year are expected to be 5*(1+0.2)4 thus, 10.368. By the end of year 5 the value would increase by 15%, hence 11,9232. This number discounted by market’s capitalization rate would be equal to 157.013 .
Why my calculations are wrong ? The solution states that the answer would need to be equal to 47,04. Am I missing something ? Thanks,